Cost Approach and those who "mail it in"

[David Mescon]

We have been discussing, primarily, appraisal theory and the theoretical application thereof. From a more pragmatic perspective, the CA is inapplicable in the appraisal of single family residential properties more often than it is applicable. the current dynamics of the majority of markets and submarkets have, as of late, rendered the CA inapplicable even more often than before.

 

[J Grant]

David, tis true. That is why in most of my reports, though I include it, I state it is included as a value indicator and is not a reliable MV indicator and not weighted toward the opinion of MV.

I do think it has its uses as a check on the other MV opinions in a report and gives a rough idea of land to value ratio and a rough idea of cost to build new and beyond that its uses are limited due to unreliabilty, extraction of depreciation getting more unweildy the older the house etc.

 

[Terrel L. Shields]

From a more pragmatic perspective, the CA is inapplicable in the appraisal of single family .... the current dynamics of the majority of markets ..., rendered the CA inapplicable even more often than before.

untrue imho...the CA is more important than ever to reverse engineer your comps and estimate that market negative. It is that cost / extraction method that is most useful.

Further, if you accurately gauge the deprecation from the sales, then you have an accurate measure CA depreciation. Ultimately, the CA and SA rely upon the same market data to compliment each other. When the CA prior to allowance for Ex Ob comes in low to the sales, then clearly EX OB does not exist and the market is over-heating (COST of PRODUCTION < SA) whereas when the CA is clearly higher than the SA, then you have today's market - bummer. Ultimately, it is INCOME and the preception thereof that 'counts' the most. People would not build nor buy if they did not see the financial advantage of building/buying in a positive fashion.

Yes, there is usually one "best" way to value a property. But that does not distract from the existence of the interlocking relationship between sales (yesterday's history) v. cost (today) v. income (tomorrow)

 

[incognito]

I state it is included as a value indicator and is not a reliable MV indicator

I'm still quite confused. If it is a "value indicator" but not a reliable "market value indicator", than just what "value" is it indicating (you are stating that it IS a value indicator...). Your verbiage makes no sense to me.

The cost approach in ALL instances is a market value indicator. Now whether or not you feel it has credibility, and whether or not you select to give it emphasis or consideration in the final reconciliation of the opinion of value is up to you, but the cost approach conclusion IS a MARKET VALUE indicator, ALWAYS.

 

[J Grant]

I'm still quite confused. If it is a "value indicator" but not a reliable "market value indicator", than just what "value" is it indicating (you are stating that it IS a value indicator...). Your verbiage makes no sense to me.

Replacement cost value , an indicator of replacement cost value.

The cost approach in ALL instances is a market value indicator. Now whether or not you feel it has credibility, and whether or not you select to give it emphasis or consideration in the final reconciliation of the opinion of value is up to you, but the cost approach conclusion IS a MARKET VALUE indicator, ALWAYS.[/quote]

Why? Where does it say that the CA is ALWAYS a MV indicator? NONE of the value indicators are MV indicators until an appraiser decides they are reliable as such (in reports where the purpose is to develop an opinion of MV)

Re, in a report asking for liquidation value, none of the value indicators is an indication of liquidation value till an appraiser says they are relying on it for an opinon of LV.

Whether liquidation or insurance value or MV etc the appraiser applies certain criteria to the values developed in the three approaches, and then decides if the results of the approaches are reliable for an opinion of...MV, LV, (the type of value the appraiser is trying to find)

 

[CANative]

The "A" in CA stands for Approach. And "Approach" is generally taken to mean an approach to value. If the appraiser is using a appraisal report form with a pre-printed definition of value and that definition is for Market Value then it stands to reason that the CA is an approach to market value.

You can't just sum the cost of the sticks and bricks and get to market value. You need to include market components. EP/EI is just that.

 

[Lost Cause]

Yes, It Is A Market Value Indicator

The cost approach in ALL instances is a market value indicator.

I think where some folks are getting hung up is not on whether the CA is a market value indicator, but on whether it is a meaningful market value indicator.

As I don't believe there's any relationship between cost and value, I don't find the approach to be in any way a reliable indicator of market value.

 

[CANative]

As I don't believe there's any relationship between cost and value, I don't find the approach to be in any way a reliable indicator of market value.

I think I disagree. I think there is a strong relationship between cost and value. If there is a market for canned peas that have been hand-picked and individually polished producers would sell them for more because they cost more to produce.

 

[Lost Cause]

I think I disagree. I think there is a strong relationship between cost and value. If there is a market for canned peas that have been hand-picked and individually polished producers would sell them for more because they cost more to produce.

Fine with me; I can agree to disagree. Whether there's a relationship between cost and value has been debated in appraisal circles since there's been real estate appraisers.

Though I don't see what's analogous between real estate and canned peas.

 

[CANative]

"The cost approach reflects market thinking because market participants relate value to cost. Buyers tend to judge the value of an existing structure not only by considering the prices and rents of similar buildings, but also by comparing the cost to create a new building with optimal physical condition and functional utility. Moreover, buyers adjust the prices they are will to pay by estimating the costs to bring an existing structure up to the physical condition and functional utility they desire."

The Appraisal of Real Estate, 13th Edition.